Many consider having an estate plan a necessity only if you’re extremely wealthy or have a considerable amount of assets. However, believing this myth and not planning ahead could leave your family and financial affairs in shambles. It’s never too early to consider how you’d like your assets to be handled if something happens to you.
Another myth people tend to believe is that estate planning only encompasses having a will or trust, which is not the case. Having a comprehensive plan ensures easier management of your affairs when you’re no longer around. It may not be the most pleasant thing to think about, but doing so can bring you and your family a huge sense of relief.
While there are many documents you can use to indicate your wants after death or incapacitation, below are five key documents you may want to consider having.
There are two types of wills: a living will and a last will. While they sound very similar, they actually serve two very different purposes.
A living will covers exactly what you’d want to happen in case you’re rendered seriously ill, incapacitated or unable to speak for yourself. This legal document communicates what you’d like to occur medically, such as your preference on being on life support and other life-sustaining measures. This is extremely important to have in order for your family and any medical personnel to act according to your wishes.
A last will goes into action after you’ve passed away. A well planned last will very specifically assign who gets what, how much and when. This is extremely important to have in place to minimize any controversy or disagreements amongst your family. It can also name who you’d want to be your children’s guardian in case of death before they reach adulthood.
If you die without a will, you essentially will have no say in how your assets are distributed. As one could imagine, this can cause strife between family members. Without a will, your estate will go through the probate process. This means the distribution of your assets will be decided by the court—often being a long and tiresome process.
Trusts are another option for the passing on of your estate. A trust is an agreement between you and another entity, either a person or institution, to distribute your assets to your beneficiaries as you see fit. You can design trusts to be arranged in many ways and control who gets access to what, for how long and when from beyond the grave.
Creating a trust can protect your estate from your heirs’ creditors or inability to properly manage money. Trusts also often avoid going to probate court, which is desirable for a few reasons:
- Your beneficiaries can receive your assets in a more timely fashion.
- It’s more private as court records are public knowledge.
- There are no court fees to pay.
While there are many types of trusts, there are two main distinctions: revocable or irrevocable.
These types of trusts allow you to stay in control of your assets during your lifetime. Once it’s been created, you as the grantor can make any provisions you want, as well dissolve it at any time. While a revocable trust can stay out of probate, it’s subject to estate taxes.
An irrevocable trust is more concrete and less flexible as once it’s created, you as the grantor cannot change it. Any assets included in the irrevocable trust are essentially transferred out of your control and can’t be dissolved once it’s established. The major plus to an irrevocable trust is that the assets included are usually not subject to estate taxes as they’re not technically a part of your estate.
3. Power of Attorney
This legal document grants someone the authority to make decisions for you when you’re incapacitated or no longer around. In order for the document to be valid, it must be created when you’re mentally competent. Anything that’s not clearly listed in other estate planning documents will be decided by your Power of Attorney. This is why it’s important to choose someone you trust and update throughout your life if anything changes.
4. Beneficiary Designations
There are some possessions, such as IRAs, 401(k)s, life insurance policies and annuities, that are considered non-probate assets. Once you pass away, these assets are given to the designated beneficiary. A beneficiary designation overrules any distributions laid out in a will, which is why it’s extremely important that these are up-to-date and align with your wishes.
5. Letter of Intent
A letter of intent is not technically a legal document, but it still has great value. This letter outlines any specific requests, instructions or crucial information for your family and friends. This could be usernames and passwords for important online accounts, funeral preferences, instructions for the care of pets, messages you’d like to leave for loved ones and more.